Financial Transaction Tax fires move to alternatives

By: David WiganPublished on: Tuesday, February 19, 2013

The European Commission’s proposals to introduce a Financial Transaction Tax (FTT) across Europe have prompted widespread controversy. But with the Italian government set in the coming weeks to follow France in introducing its version of the tax, investors are taking action to make sure they minimise their liabilities.

The so-called
Tobin tax, named after economist James Tobin, is set to
impose a levy of 0.1% on transactions in shares and bonds, and
0.01% on derivatives where at least one party to the
transaction is established in an EU member state that has
adopted the rules. The European Commission estimates the tax
could bring in 30-35 billion a year.

Currently some 11 EU members are signed up in principle,
including Germany, Italy and France, which launched its version
of the tax in August after the Commission dropped plans for an
EU-wide levy, amid insufficient support. Italys tax comes
into force on March 1, and covers equities, derivatives and
high frequency trading.

Its relatively simple to enter into a contract
with a bank which delivers the performance of a name or to buy
a contract for difference, said Fabrice Seiman, co-chief
executive officer of Lutetia Capital, an asset manager in Paris
that oversees $200 million. For institutional investors
its relatively simple to find alternatives.

The low level of the FTT means that its impact on individual
transactions is likely to be minor, Seiman said. However, it is
vital the tax is implemented across Europe, because any failure
to do so will lead to unfair competition and market
distortions.

FTT is not a bad thing per se, but it is vital the tax
is implemented everywhere, because any failure to do so will
lead to unfair competition and market distortions, Seiman
says.

If you have two companies in the same sector with a
similar valuation but listed on different exchanges, then
retail investors will always prefer to choose the one they can
buy without paying a FTT  he said. The most
important thing is to have a level playing field.

Given the controversy over the tax,
Europe-wide adoption seems unlikely. The UK, which has
charged stamp duty on the transfer of certain shares and
securities since 1986, has been vocal in its opposition. It
says any tax would have to be applied globally to prevent
financial traders rerouting their transactions to countries
outside of the EU.

Not all EU countries are in favour of introducing a
financial transaction tax. The UK is opposed, as are
Luxembourg, Malta and Sweden, said Martin Walker, a
director in Deloittes financial services tax team.
For that reason, the EU moved to its enhanced cooperation
procedure (ECP) under which a minority of countries can proceed
without the need for a unanimous vote.

A revised proposal for the FTT was published earlier this
month. It must be approved by the ECP countries and is set to
come into force on January 1 2014.

In practice it seems unlikely that it can be agreed
upon by the start of next year, Walker said. It
will need not only political agreement to be reached between
all 11 countries but also national legislation to be passed in
each country to introduce the FTT.

Alongside the FTT, France has enacted a tax on high
frequency trading at a flat rate of 0.01%, applying to all
entities carrying on high frequency trading in France. High
frequency trading is defined as dealing with orders through an
automatic device, provided the interval between such orders
does not exceed half a second. The tax also applies when the
rate of cancellation/modification of all orders in a trading
day exceeds 80%.

Due its territoriality, the tax leaves the door open for
relocations, and French firms may set up overseas to avoid
paying, analysts say.

Certainly banks and others operating on the continent
are going to need to think about how they respond to
this, said Bradley Wood, a partner at consultant
Greyspark Partners. However, whether the tax is going to
be enough to change strategies in high frequency trading it is
probably too early to say.

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